Obama plan to tax large financial firms designed to pay for TARP losses

Declaring "we want our money back," President Obama wants to slap a tax on banks to recoup the money that the American public spent on bailing out large financial institutions on the brink of collapse.

President Obama proposed a new tax Thursday to collect an estimated $90 billion over the next decade from 50 companies that he called responsible for driving the nation into economic crisis.

The president said that the renewed profitability of large banks, and their plans to reward employees with billions of dollars in bonuses for 2009, underscored that firms were now sufficiently healthy to reimburse the government for its massive rescue efforts.

"We want our money back and we're going to get it," Obama said. "If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to pay back every cent they received from taxpayers."

Democrats welcomed the proposal as good politics, a potential boost for a White House that has struggled with the public perception that it has shown greater concern for the health of banks than the broader economy. Administration officials also said that the tax would push firms to take fewer risks and, they hoped, to pay smaller bonuses.

But the plan must be approved by Congress, and it faces uncertain prospects in a closely divided Senate that may be reluctant to raise taxes ahead of the midterm elections. Some financial experts also were quick to criticize the idea as being unlikely to achieve its stated policy objectives.

"The new big-bank tax is just like charging a nickel sin tax on a half-gallon of cheap liquor -- it may make moralists feel good, but it doesn't do much to stop bad behavior," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, which tracks regulatory issues for financial industry clients.

The industry continued to attack the plan Thursday, warning that increasing taxes would reduce lending, and that the cost would be imposed on clients.

"This proposed tax on banks, many of whom have fully paid back TARP funds with profit to the government, does not support economic recovery, increase lending, or meet the needs of the American consumer," said Richard Hunt, president of the Consumer Bankers Association.

The "Financial Crisis Responsibility Fee" is designed to recoup the cost of the government's highest-profile bailout effort, the $700 billion Troubled Assets Relief Program created by Congress in the fall of 2008, from a small group of companies, many of which did not benefit directly. It would fall on roughly 50 banks, insurance companies and Wall Street trading houses with assets of more than $50 billion, including American International Group and GMAC, which are owned by the government; General Electric, an industrial company with a substantial financial business; and the subsidiaries of foreign banks including Deutsche Bank.

Smaller banks and automakers General Motors and Chrysler, which got large helpings of federal aid, would not pay.

Officials began to consider options for recouping the cost of the bailout in August, according to a senior administration official. He said four approaches were considered, including a direct tax on bonuses and a toll on various kinds of financial transactions.

The administration decided on what amounts to a tax on risk, a levy of $1,500 for every $1 million borrowed to finance lending and other activities. The formula excludes deposits insured by the Federal Deposit Insurance Corp., the largest pool of borrowed money at most banks, since firms already pay for the government's guarantee of that money. It would instead focus on other kinds of borrowed money, which played a key role in fueling the financial crisis.

"It showed a consistency with what we are trying to do with financial reform," the official said.

Because of its focus on borrowed money other than deposits, the tax would fall more heavily on investment banks such as Goldman Sachs and Morgan Stanley. Retail banks such as Wells Fargo and Capital One mostly rely on deposits as a funding source for lending.

The size of the tax is based on the administration's estimate that it will lose $117 billion of the $700 billion authorized by Congress. If the final loss from that program exceeds $90 billion, the government would continue to collect the tax until it is recouped. If the total loss equals or falls short of $90 billion, the tax would expire after 10 years.